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1 30 July 2009 news release HALF-YEARLY REPORT TO 30 JUNE 2009 SUMMARY SIX MONTHS RESULTS - unaudited Change Revenue 6,780m 5,457m +24% Profit from operations 2,111m 1,724m +22% Basic earnings per share 73.23p 62.48p +17% Adjusted diluted earnings per share 77.27p 62.02p +25% Interim dividend per share 27.9p 22.1p +26% Group revenue increased by 24 per cent to 6,780 million as a result of the continued good pricing momentum, volume growth from acquisitions made in the middle of last year (Skandinavisk Tobakskompagni (ST) and Tekel) and the favourable impact of exchange rate movements. Revenue increased by 14 per cent at constant rates of exchange. The reported profit from operations was 22 per cent higher at 2,111 million with a 23 per cent increase after adjusting items. Profit from operations, after adjusting items, would have been 13 per cent higher at constant rates of exchange, despite the adverse transactional impact of exchange rates on costs. Group volumes from subsidiaries were 349 billion, an increase of 5 per cent, as a result of the acquisitions of ST and Tekel. Excluding the benefits of these acquisitions, volumes were down 2 per cent on last year, mainly driven by market declines in Russia, Ukraine, Japan and Mexico. The four Global Drive Brands continued their strong performance and achieved overall volume growth of 5 per cent. Dunhill was up 8 per cent, Lucky Strike 7 per cent and Pall Mall grew by 10 per cent, while Kent volumes fell 2 per cent. Adjusted diluted earnings per share rose by 25 per cent, principally as a result of the strong growth in profit from operations and favourable exchange movements. Basic earnings per share were up 17 per cent at 73.23p (2008: 62.48p). The Board has declared an interim dividend of 27.9p, a 26 per cent increase on last year, to be paid on 29 September The acquisition of an 85 per cent stake in PT Bentoel Internasional Investama Tbk was completed on 17 June 2009 and did not have any impact on profit from operations for the six months to 30 June The Chairman, Jan du Plessis, commented Despite difficult economic and trading conditions in many countries, the continued market share growth from our Global Drive Brands, our ability to innovate and our broad geographic spread should continue to stand us in very good stead. These half-yearly results give us confidence that we are very much on track to deliver another year of strong earnings growth. ENQUIRIES: INVESTOR RELATIONS: Ralph Edmondson/ Rachael Brierley PRESS OFFICE: David Betteridge/Catherine Armstrong/ Elif Boutlu British American Tobacco p.l.c. Globe House 4 Temple Place London WC2R 2PG Registered in England and Wales no

2 BRITISH AMERICAN TOBACCO p.l.c. HALF-YEARLY REPORT TO 30 JUNE 2009 INDEX PAGE Chairman's statement 2 Business review 3 Dividends 9 Risks and uncertainties 10 Going concern 10 Statement of Directors responsibilities 11 Independent review report to British American Tobacco p.l.c. 12 Group income statement 13 Group statement of comprehensive income 14 Group statement of changes in equity 15 Group balance sheet 16 Group cash flow statement 18 Accounting policies and basis of preparation 19 Non-GAAP measures 21 Foreign currencies 21 Segmental analyses of revenue and profit 22 Adjusting items 25 Other changes in the Group 26 Net finance costs 28 Associates and joint ventures 29 Taxation 30 Earnings per share 30 Cash flow 32 Total equity 36 Litigation: Franked Investment Income Group Litigation Order 36 Contingent liabilities 37 Related party disclosures 37 Share buy-back programme 37 Financial calendar 38 Calendar for the interim dividend Corporate information 38 Disclaimers 40 Distribution of report 40

3 CHAIRMAN S STATEMENT British American Tobacco has continued to perform remarkably well, with adjusted diluted earnings per share increasing by 25 per cent to 77.27p in the first half of the year. The Board has declared an interim dividend of 27.9p, a rise of 26 per cent. Revenue rose by 14 per cent at constant rates of exchange and by 24 per cent at current rates. Profit from operations, after adjusting items, grew by 13 per cent at constant rates and by 23 per cent to 2,164 million at current rates. These very strong results have been driven by good pricing momentum, volume growth from the acquisitions of Tekel and ST in the middle of last year, and the favourable impact of exchange rate movements on the translation of the Group's results into sterling. The benefit from exchange was 187 million. Our volume from subsidiaries rose by 5 per cent to 349 billion cigarettes, as a result of the acquisitions. Excluding them, volume was down 2 per cent following relatively large market declines in countries such as Russia, Ukraine, Japan and Mexico. Market sizes have principally been affected by rising unemployment, excise-driven price increases, the growth in illicit trade and trade inventory reductions. Whilst down-trading on a global basis is limited, it is affecting some markets. British American Tobacco s premium volume declined by 1 per cent on an organic basis and low price volume by 5 per cent, leading to an improvement in the quality of our portfolio. The four Global Drive Brands grew by 5 per cent, leading to improved share in many markets. Kent was 2 per cent lower, following market declines in its two major markets of Russia and Japan, but Dunhill was up 8 per cent, Lucky Strike up 7 per cent and Pall Mall up 10 per cent. The volume from associate companies was 94 billion. After adjusting items and at constant rates of exchange, Reynolds American's contribution was up 5 per cent and ITC's was up 10 per cent. Adjusted diluted earnings per share grew by 25 per cent to 77.27p, in line with the growth in profit from operations. The Board has declared an interim dividend of 27.9p, an increase of 26 per cent, which will be paid on 29 September to shareholders on the register on 21 August. In line with our established practice, the interim dividend payment represents one-third of the total dividend in respect of last year. Although it had no impact on the profit from operations in these results, the Group acquired control of PT Bentoel Internasional Investama Tbk (Bentoel) in Indonesia on 17 June for 303 million. Bentoel is Indonesia's fourth largest cigarette maker, with a market share of some 7 per cent. Indonesia is the world's fifth largest tobacco market by volume and in the top ten in terms of profit. The move represents an excellent strategic opportunity to enter the large kretek market in Indonesia and should present us with a good platform for further growth. Despite difficult economic and trading conditions in many countries, the continued market share growth from our Global Drive Brands, our ability to innovate and our broad geographic spread should continue to stand us in very good stead. These half-yearly results give us confidence that we are very much on track to deliver another year of strong earnings growth. Jan du Plessis 29 July 2009 Page 2

4 BUSINESS REVIEW Group revenue increased by 24 per cent to 6,780 million as a result of the continued good pricing momentum, volume growth from acquisitions made in the middle of last year (Skandinavisk Tobakskompagni (ST) and Tekel) and the favourable impact of exchange rate movements. Revenue increased by 14 per cent at constant rates of exchange. The reported profit from operations was 22 per cent higher at 2,111 million with a 23 per cent increase after adjusting items. Profit from operations, after adjusting items, would have been 13 per cent higher at constant rates of exchange, despite the adverse transactional impact of exchange rates on costs. The recently announced acquisition of PT Bentoel Internasional Investama Tbk did not have any impact on profit from operations. Group volumes from subsidiaries were 349 billion, an increase of 5 per cent, as a result of the acquisitions of ST and Tekel. Excluding the benefits of the acquisitions, volumes were down 2 per cent on last year, mainly driven by market declines in Russia, Ukraine, Japan and Mexico. However, volume losses were mainly in the low-price segment with premium just 1 per cent lower. Good volume growth in Pakistan, Bangladesh, South Korea, Uzbekistan, Nigeria and the Gulf Cooperation Council (GCC) was more than offset by declines in Russia, Japan, Malaysia, Brazil, Mexico, Italy, Ukraine and South Africa. Despite market size declines in many countries, the four Global Drive Brands achieved good overall volume growth of 5 per cent and improved shares in a number of markets. Over half of the growth was contributed by brand migrations. Although there was pressure on the premium segment, Dunhill grew market share in all its key markets, except in Taiwan, while Kent increased market shares in its main markets, apart from Japan. Kent volumes fell by 2 per cent with volume growth in Romania, Uzbekistan and Azerbaijan, offset by industry declines in Japan and Russia and despite increasing its market share in Russia. Dunhill rose by 8 per cent, with growth in the GCC, Russia, South Korea and Brazil, partially offset by declines in Malaysia, Taiwan and South Africa. Dunhill s growth was mostly driven by a brand migration in Brazil. Lucky Strike volumes were 7 per cent higher with growth in Germany, France, Italy, Indonesia, Chile and Brazil, partially offset by declines in Spain, Japan and Argentina. This was largely the result of industry volume decline. Market share grew well across all its key markets except Japan, where it was slightly down. Pall Mall volumes increased by 10 per cent with growth in Germany, Uzbekistan, Mexico, Turkey and Chile, partially offset by lower volumes in Italy, Pakistan, Russia, Romania and Hungary. Despite lower volumes, market share grew in Romania and Hungary. In Asia-Pacific, profit at 557 million was up 101 million, mainly as a result of favourable exchange rates, backed by strong performances in Australia, Pakistan, Bangladesh and Vietnam. At constant rates of exchange, profit would have increased by 25 million or 5 per cent. Volumes at 88 billion were 2 per cent lower as increases in Pakistan, Bangladesh and South Korea were more than offset by lower volumes in Japan and Malaysia. Strong profit growth in Australia was attributable to higher pricing and continued cost saving initiatives, partially offset by increased competitor price discounting. Volumes and market share were in line with last year despite the growth experienced in Pall Mall and Winfield. In New Zealand, overall volumes were down as the challenging economic environment impacted the business. Profit was in line with last year as price increases and lower costs were offset by the unfavourable product mix. Page 3

5 Business review cont... In Malaysia, Dunhill achieved a record market share and Kent was successfully relaunched. This was offset by a decline in tail brands. Volumes decreased in line with the overall contraction of the market, exacerbated by the continued growth in illicit trade and steep excise increases over the last two years. A strong growth in profit was predominantly attributable to favourable exchange rates with an improved product mix, higher pricing and cost management offset by the impact of lower volumes. In Vietnam, strong profit growth was achieved through a combination of price increases, productivity initiatives, improved product mix and favourable exchange rates. Whilst market share was slightly down on last year, volumes were maintained. Volumes and market share in South Korea grew due to a good performance from Dunhill. Profit decreased as a weaker exchange rate had an adverse transactional impact, leading to higher material costs. In Taiwan, profit improved due to price increases, cost savings and the favourable exchange rate. In Japan, volumes suffered as a result of significant industry decline. Although the premium priced Kool continued to grow, market share was down slightly. Significant profit growth was achieved predominantly through favourable exchange rates, productivity savings and a better product mix. Pakistan continued to experience good growth in both volumes and market share. Profit was up significantly due to the higher volumes, combined with price increases. In Bangladesh, volumes grew although market share was slightly lower due to the substantial growth in the low-price segment of the market. Profit was significantly higher due to increased volumes, improved sales mix, the effect of prior year price increases and lower costs. Profit continued to grow in Sri Lanka, benefiting from higher prices, a better sales mix and continuing productivity improvements. Volumes were down due to the excise-led price increases and diminishing consumer affordability. In Americas, profit rose by 63 million to 579 million, following a strong performance from Brazil. At constant rates of exchange, profit would have risen by 57 million or 11 per cent. Volumes were down 5 per cent at 74 billion, with decreases experienced by most markets across the region. In Brazil, significant profit growth was achieved primarily as a result of a recent price increase in anticipation of an excise increase, coupled with a better brand mix. The higher prices led to lower volumes, although overall market share increased on last year. Dunhill performed well due to its continuing migration from Carlton. Profit in Canada decreased as lower costs, better pricing and the benefits of a strong currency were more than offset by lower volumes and an adverse product mix. Market share for the last four quarters has been stable although it fell slightly compared to the same period last year. Volumes in Mexico were lower due to the excise-driven price increase at the end of 2008 and reduced market share. However, Montana performed well, as did Pall Mall following the migration from Boots. The reduction in volumes and increased marketing investment were only partially offset by the price increase, resulting in a profit decline. In Argentina, profit fell due to adverse exchange impacts and lower volumes. Page 4

6 Business review cont... In Chile, the contraction of the market led to lower volumes. Although Lucky Strike and Pall Mall both performed well, market share was slightly down. Profit decreased as a result of the lower volumes and higher costs, including the adverse exchange impact on imported materials. Profit increased in Peru, although volumes were slightly lower than last year due to general market contraction. However, market share remained strong. Market share in Venezuela improved, driven by the growth of Lucky Strike and the strength of the brand portfolio. However, volumes declined, impacted by excise-driven price increases in 2008 and the current year. Profit was significantly lower due to the adverse impact of exchange rates. In Colombia, market share is down on last year with decreasing volumes driven by strong competition in the market and a reduction in trade inventory levels. Profit was higher due to lower costs. Profit increased in the Central America and Caribbean area. This was due to exchange gains, higher prices and an improved product mix in key markets, partially offset by lower volumes. Market share remained strong, with Pall Mall and Dunhill being key drivers for the growth. Profit in Western Europe increased by 175 million to 509 million, mainly as a result of strong performances from Italy, Germany, Spain, Belgium, and the Czech Republic, coupled with the acquisition of ST in At constant rates of exchange, profit would have increased by 100 million or 30 per cent. Regional volumes were up 18 per cent to 63 billion, with significant increases arising due to the new ST businesses in Poland, Denmark and Greece, partially offset by declines in Italy, Spain and the Netherlands. Profit increased significantly in Italy mainly driven by higher prices, productivity savings and favourable exchange rates. Volumes dropped as the total market contracted and there was also a small decline in market share, mostly due to MS and tail brands, partly offset by growth in Lucky Strike. In Germany, sales volumes were in line with last year, benefiting from lower illicit trade and stable consumption. Market share grew with good performances from Pall Mall and Lucky Strike compensating for tail brand declines. This, along with favourable exchange rates, contributed to a higher profit. Volumes and market share in France were stable, with the strength of Lucky Strike and Pall Mall offsetting declining tail brands. Profit benefited from a favourable exchange rate. In Spain, profit increased reflecting price rises in January and continuing cost management, despite lower volumes in a much reduced market. Profit improved significantly in Belgium with stable volumes and mix benefits supported by lower costs. There was good growth in Pall Mall following the 2008 migration from Winfield, supported by an increase in Kent. In the Netherlands, cigarette volumes decreased following the excise rise in late Profit increased due to favourable exchange rates, slightly offset by the impact of the overall market decline. In Poland, profit increased significantly due to improved pricing, coupled with the acquisition of ST which also led to significantly higher volumes. Both Lucky Strike and Pall Mall increased market share. Page 5

7 Business review cont... In Hungary, the impact of declining volumes was offset by improved margins and productivity benefits, leading to an increase in profit. Market share remained stable in the light of declining industry volumes. Profit and volumes were higher in the Czech Republic, driven predominantly by the reversal of the 2007 trade load effect and the ST acquisition, which positively impacted market share. Profit in Switzerland increased due to favourable exchange rates and the 2008 price increases, offsetting the impact of decreased volumes. Market share improved, with Parisienne demonstrating a strong performance. The acquisition of the ST businesses transformed results in Scandinavia and they have been successfully integrated. Profit in the Eastern Europe region decreased by 16 million to 183 million. This was principally due to lower volumes and the adverse transactional impact of exchange rates on product costs. Profit would have been down a similar amount at constant rates of exchange. Volumes at 60 billion were 9 per cent lower than last year, with decreases seen in a number of markets as a result of overall industry declines following the excise-driven price increases and also a lower market share in Russia. In Russia, volumes were impacted by a lower market share and a decline in market size. Profit was lower as a result of lower volumes, higher marketing investments and adverse transactional exchange effects on costs, which more than offset the impact of higher prices. Market share fell in the second half of 2008, as a result of the decline of low-price and local brands, following price increases that were not immediately followed by competitors. Market share was stable in the second quarter of this year, as competitors price increases flowed through to the market. In Romania, market share continued to grow through strong performances from Kent, Dunhill and Vogue and, as a result, volumes declined by less than the industry decline. Increased marketing investment together with the reduction in volumes led to lower profit. In Ukraine, Kent continued to grow its market share, although total volumes and market share decreased. Profit was lower as a result of the rapid currency devaluation, combined with the excise increases. Strong volumes and market share performances were achieved in the Caucasus. This was driven by good performances by Kent and Pall Mall. In Uzbekistan, profit increased significantly on the back of strong volumes and market share gains. Profit from the Africa and Middle East region grew by 84 million to 336 million. At constant rates of exchange, profit would have increased by 53 million or 21 per cent, mainly driven by Nigeria, the GCC and the benefit of the acquisition of Tekel during Volumes were 37 per cent higher at 64 billion, following increases in Turkey, GCC, Nigeria and Egypt, which was partly offset by a decline in South Africa. In South Africa, volumes are down from last year largely due to an increase in illicit trade and reductions in trade inventories. However, market share increased, with the relaunched Peter Stuyvesant showing strong growth and achieving record market share, whilst Kent and Dunhill continue to perform well. Profit was broadly in line with last year. Profit in Nigeria increased significantly due to increased volumes and lower costs. Volumes increased strongly as a result of marketing and supply chain initiatives with an excellent performance by Pall Mall. It was also positively impacted by anti-illicit trade initiatives from the government. Page 6

8 Business review cont... In the Middle East, market share grew across the area and as a result volumes increased significantly. Dunhill showed excellent growth in the GCC whilst sales of Kent and Lucky Strike improved markedly in the Levant. Profit rose as a result of increased prices, improved product mix and lower costs coupled with the favourable exchange rate. In Turkey, the Tekel business acquired in 2008 has been successfully integrated. Kent, Pall Mall and Viceroy all performed well although total market share was lower as a result of a decline in Tekel tail brands. The above regional profits were achieved after adjusting for restructuring and integration costs, amortisation of trademarks and gains on disposal of businesses and trademarks. Profit from operations at current rates of exchange is as follows: Adjusted Adjusted Profit from profit from Profit from profit from operations operations* operations operations* m m m m Asia-Pacific Americas Western Europe Eastern Europe Africa and Middle East Total 2,111 2,164 1,724 1,757 * After adjusting for restructuring and integration costs, amortisation of trademarks and gains on disposal of businesses and trademarks as explained on page 25. Results of associates Associates principally comprise Reynolds American and ITC. ST was an associate until 2 July 2008 when the cigarette and snus businesses of ST were acquired and from that date it was consolidated into the Group results. The Group s share of the post-tax results of associates decreased by 62 million, or 21 per cent, to 231 million. After adjusting items in 2008 and in 2009, explained on page 29, the Group s share of the post-tax results of associates increased by 19 per cent to 279 million, with a decline of 5 per cent at constant rates of exchange. The decline in the Group s share of post-tax results of associates reflects the non-inclusion of ST in the 2009 associates results. Page 7

9 Business review cont... The contribution from Reynolds American was down 20 per cent at 149 million. Excluding the impairment of brands in 2009 and the gain on termination of a joint venture in 2008, the contribution was 39 per cent higher at 197 million. At constant rates of exchange this increase was 5 per cent. Earnings were higher as increases in pricing, productivity and moist-snuff volume more than offset cigarette volume declines and higher pension and legal expenses. The Group s associate in India, ITC, continued its strong profit growth and its contribution to the Group rose by 13 million to 77 million. At constant rates of exchange, the contribution would have been 10 per cent higher than last year. The segmental analysis of the Group s share of the post-tax results of associates and joint ventures at current rates of exchange is as follows: Adjusted Adjusted Share of post-tax share of post-tax Share of post-tax share of post tax results results * results results * m m m m Asia-Pacific Americas Western Europe Eastern Europe Africa and Middle East Total * After adjusting for trademark impairments, additional ST income and gain on termination of joint venture as explained on page 29. CIGARETTE VOLUMES The segmental analysis of the volumes of subsidiaries is as follows: 3 months to 6 months to Year to bns bns bns bns bns Asia-Pacific Americas Western Europe Eastern Europe Africa and Middle East Associates volumes decreased by 15 per cent to 94 billion largely as a result of the ST transaction. With the inclusion of associates volumes, total group volumes were 443 billion (2008: 445 billion). Page 8

10 DIVIDENDS The Board has declared an interim dividend of 27.9 pence per ordinary share of 25p for the six months ended 30 June The interim dividend will be payable on 29 September 2009 to shareholders registered on either the UK main register or the South African branch register on 21 August 2009 (the record date). In compliance with the requirements of Strate, the electronic settlement and custody system used by the JSE Limited (JSE), the following salient dates for the payment of the interim dividend are applicable: Last date to trade cum dividend (JSE): Friday 14 August 2009 Shares commence trading ex dividend (JSE): Monday 17 August 2009 Shares commence trading ex dividend (LSE): Wednesday 19 August 2009 Record date (JSE and LSE): Friday 21 August 2009 Payment date: Tuesday 29 September 2009 As the Group reports in sterling, dividends are declared and payable in sterling except for shareholders on the branch register in South Africa whose dividends are payable in rand. A rate of exchange of :R = as at 28 July 2009 (the closing rate on that date as quoted by Bloomberg), results in an equivalent interim dividend of SA cents per ordinary share. From the close of business on 14 August 2009 until the close of business on 21 August 2009, no transfers between the UK main register and the South African branch register will be permitted and no shares may be dematerialised or rematerialised between 17 August 2009 and 21 August 2009, both days inclusive. This interim dividend amounts to 552 million. The comparative dividend for the six months to 30 June 2008 of 22.1 pence per ordinary share amounted to 440 million. In accordance with IFRS, the interim dividend will be charged in the Group results for the third quarter. The condensed consolidated financial information for the six months to 30 June 2009 include the final dividend paid in respect of the year ended 31 December 2008 of 61.6p per share amounting to 1,241 million (30 June 2008: 47.6p amounting to 954 million). Page 9

11 RISKS AND UNCERTAINTIES The principal risks and uncertainties affecting the business activities of the Group were identified under the heading Key Group risk factors, set out on pages 30 to 35 of the Annual Report for the year ended 31 December 2008, a copy of which is available on the Group s website The key Group risks were summarised under the headings of: - Illicit trade; - Excise and tax; - Financial; - Marketplace; - Regulation; - Litigation; and - Information technology. In the view of the Board the key risks and uncertainties for the remaining six months of the financial year continue to be those set out in the above section of the 2008 Annual Report, coupled with the challenges of incorporating the recent acquisition of Bentoel (see page 26) into the Group. These should be read in the context of the cautionary statement regarding forward-looking statements on page 40. GOING CONCERN The Annual Report and the Half-Yearly Report have been prepared on a going concern basis. After reviewing the Group s annual budgets, plans, current forecasts and financing arrangements, as well as the current trading activities of the Group, the Directors consider that the Group has adequate resources to continue operating for the foreseeable future. A full description of the Group s business activities, its financial position, cash flows, liquidity position, facilities and borrowing position, together with the factors likely to affect its future development, performance and position, are set out in the Business Review and Financial Review and in the notes to the accounts, all of which are included in the 2008 Annual Report that is available on the Group s website, This Half-Yearly Report provides updated information regarding the business activities for the six months to 30 June 2009 and of the financial position, cash flow and liquidity position at 30 June The Group has, at the date of this report, sufficient financing available for its estimated existing requirements for at least the next twelve months. This, together with the proven ability to generate cash from trading activities, the performance of the Group s Global Drive Brands, its leading market positions in a number of markets and its geographical spread, as well as numerous contracts with established customers and suppliers across different geographical areas and industries, provides the Directors with the confidence that the Group is well placed to manage its business risks successfully despite the current financial conditions and uncertain outlook in the general global economy and financial climate. Page 10

12 STATEMENT OF DIRECTORS RESPONSIBILITIES The Directors confirm that this condensed consolidated financial information has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union, and that this Half-Yearly Report includes a fair review of the information required by the Disclosure and Transparency Rules of the Financial Services Authority, paragraphs DTR and DTR The current Directors of British American Tobacco p.l.c. are as listed on page 54 in the British American Tobacco Annual Report for the year ended 31 December 2008, with the exception of Gerry Murphy who was appointed a Non-Executive Director on 13 March 2009 and Thys Visser who retired at the conclusion of the Annual General Meeting on 30 April Details of all the current Directors of British American Tobacco p.l.c. are maintained on For and on behalf of the Board of Directors: Jan du Plessis Chairman Ben Stevens Finance Director 29 July 2009 Page 11

13 INDEPENDENT REVIEW REPORT TO BRITISH AMERICAN TOBACCO p.l.c. Introduction We have been engaged by the Company to review the condensed consolidated financial information in the Half-Yearly Report for the six months ended 30 June 2009, which comprises the Group income statement, the Group statement of comprehensive income, the Group statement of changes in equity, the Group balance sheet, the Group cash flow statement, the accounting policies and basis of preparation and the related notes. We have read the other information contained in the Half-Yearly Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated financial information. Directors' responsibilities The Half-Yearly Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half-Yearly Report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. As disclosed on page 19, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated financial information in the Half- Yearly Report has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as adopted by the European Union. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed consolidated financial information in the Half-Yearly Report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial information in the Half-Yearly Report for the six months ended 30 June 2009 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. PricewaterhouseCoopers LLP Chartered Accountants 1 Embankment Place London 29 July 2009 Page 12

14 GROUP INCOME STATEMENT - unaudited 6 months to Year to m m m Gross turnover (including duty, excise and other taxes of 12,295 million ( : 9,518 million; : 21,799 million) 19,075 14,975 33,921 Revenue 6,780 5,457 12,122 Raw materials and consumables used (1,899) (1,537) (3,335) Changes in inventories of finished goods and work in progress Employee benefit costs (1,079) (806) (1,907) Depreciation and amortisation costs (285) (174) (430) Other operating income Other operating expenses (1,595) (1,322) (3,178) Profit from operations 2,111 1,724 3,572 after (charging)/crediting: - restructuring and integration costs (29) (33) (160) - Canadian settlement (102) - amortisation of trademarks (26) (24) - gains on disposal of businesses and trademarks Finance income Finance costs (224) (300) (658) Net finance costs (219) (179) (391) Share of post-tax results of associates and joint ventures after (charging)/crediting: - trademark impairments (48) (20) - additional ST income termination of joint venture restructuring costs (12) Profit before taxation 2,123 1,838 3,684 Taxation on ordinary activities (534) (494) (1,025) Profit for the period 1,589 1,344 2,659 Attributable to: Shareholders equity 1,450 1,249 2,457 Minority interests Earnings per share Basic 73.23p 62.48p p Diluted 72.75p 62.08p p The accompanying notes on pages 19 to 40 form an integral part of this condensed consolidated financial information. Page 13

15 GROUP STATEMENT OF COMPREHENSIVE INCOME - unaudited 6 months to Year to restated m m m Profit for the period page 13 1,589 1,344 2,659 Other comprehensive income: Differences on exchange (606) (196) 937 Difference on exchange reclassified and reported in profit for the period (22) Cash flow hedges - net fair value gains reclassified and reported in profit for the period (98) (22) (173) - reclassified and reported in net assets (7) 1 Available-for-sale investments - net fair value gains reclassified and reported in profit for the period (1) (1) (6) Net investment hedges - net fair value gains/(losses) 307 (39) (672) - differences on exchange on borrowings 8 (178) Revaluation of existing business 179 Retirement benefit schemes - actuarial losses in respect of subsidiaries (103) (547) - surplus recognition in respect of subsidiaries (48) - actuarial gains/(losses) in respect of associate companies 28 (396) Tax on items recognised directly in other comprehensive income (38) (23) 184 Total comprehensive income for the period 1,153 1,083 2,147 Total comprehensive income attributable to: - shareholders equity 1, ,913 - minority interests The restatement of the 30 June 2008 statement of comprehensive income reflects the change in Group accounting policy for recognition of actuarial gains and losses, together with the early adoption of IFRIC 14, as explained on page 20. The accompanying notes on pages 19 to 40 form an integral part of this condensed consolidated financial information. Page 14

16 GROUP STATEMENT OF CHANGES IN EQUITY - unaudited restated m m m Total comprehensive income for the period page 14 1,153 1,083 2,147 Employee share options - value of employee services proceeds from shares issued Dividends and other appropriations - ordinary shares (1,241) (954) (1,393) - to minority interests (108) (80) (176) Purchase of own shares - held in employee share ownership trusts (92) (116) (116) - share buy-back programme (191) (400) Minority interests in Bentoel page Acquisition of minority interests (1) (5) Other movements (222) (224) 126 Balance at beginning of period 7,215 7,089 7,089 Balance at end of period 6,993 6,865 7,215 The restatement of the June 2008 movements in total equity reflects the change in Group accounting policy for recognition of actuarial gains and losses, together with the early adoption of IFRIC 14, as explained on page 20. The accompanying notes on pages 19 to 40 form an integral part of this condensed consolidated financial information. Page 15

17 GROUP BALANCE SHEET unaudited restated restated restated m m m m Assets Non-current assets Intangible assets 11,437 8,872 12,318 8,105 Property, plant and equipment 2,796 2,496 3,076 2,378 Investments in associates and joint ventures 2,364 2,194 2,552 2,316 Retirement benefit assets Deferred tax assets Trade and other receivables Available-for-sale investments Derivative financial instruments Total non-current assets 17,352 14,163 18,812 13,399 Current assets Inventories 3,451 2,637 3,177 1,985 Income tax receivable Trade and other receivables 2,237 1,749 2,395 1,845 Available-for-sale investments Derivative financial instruments Cash and cash equivalents 1,304 2,326 2,309 1,258 7,456 7,085 8,514 5,329 Assets classified as held-for-sale Total current assets 7,473 7,370 8,739 5,365 Total assets 24,825 21,533 27,551 18,764 The restatement of the 30 June 2008 balance sheet reflects the change in Group accounting policy for recognition of actuarial gains and losses, together with the early adoption of IFRIC 14, as explained on page 20. The balance sheets as at 30 June 2008 and 31 December 2008 have been restated for the reclassification of certain derivatives, as explained on page 20. In accordance with IAS 1 Revised, an additional balance sheet comparative has been presented as at 1 January The accompanying notes on pages 19 to 40 form an integral part of this condensed consolidated financial information. Page 16

18 GROUP BALANCE SHEET unaudited cont restated restated restated m m m m Equity Capital and Reserves Share capital Share premium, capital redemption and merger reserves 3,907 3,905 3,905 3,902 Other reserves Retained earnings 1,622 1,825 1,578 1,805 Shareholders funds 6,682 6,617 6,944 6,871 after deducting - cost of treasury shares (788) (554) (745) (296) Minority interests Total equity 6,993 6,865 7,215 7,089 Liabilities Non-current liabilities Borrowings 8,369 7,895 9,437 6,062 Retirement benefit liabilities Deferred tax liabilities Other provisions for liabilities and charges Trade and other payables Derivative financial instruments Total non-current liabilities 10,203 8,990 11,458 7,131 Current liabilities Borrowings 2,522 1,760 2, Income tax payable Other provisions for liabilities and charges Trade and other payables 4,377 3,167 4,718 2,976 Derivative financial instruments ,629 5,675 8,878 4,542 Liabilities directly associated with assets classified as held-for-sale 3 2 Total current liabilities 7,629 5,678 8,878 4,544 Total liabilities 17,832 14,668 20,336 11,675 Total equity and liabilities 24,825 21,533 27,551 18,764 The restatement of the 30 June 2008 balance sheet reflects the change in Group accounting policy for recognition of actuarial gains and losses, together with the early adoption of IFRIC 14, as explained on page 20. The balance sheets as at 30 June 2008 and 31 December 2008 have been restated for the reclassification of certain derivatives, as explained on page 20. In accordance with IAS 1 Revised, an additional balance sheet comparative has been presented as at 1 January The accompanying notes on pages 19 to 40 form an integral part of this condensed consolidated financial information. Page 17

19 GROUP CASH FLOW STATEMENT unaudited 6 months to Year to m m m Cash flows from operating activities Cash generated from operations page 34 1,806 1,569 4,156 Dividends received from associates Tax paid (517) (455) (943) Net cash from operating activities 1,432 1,267 3,539 Cash flows from investing activities Interest received Dividends received from investments Purchases of property, plant and equipment (160) (117) (448) Proceeds on disposal of property, plant and equipment Purchases of intangibles (33) (15) (96) Proceeds on disposal of intangibles Purchases and proceeds on disposals of investments Proceeds from associates share buy-backs Purchase of Bentoel (300) Purchase of Tekel cigarette assets (12) (867) (873) Proceeds from ST trademark disposals and purchase of ST businesses 190 (1,243) Purchases of other subsidiaries and minority interests (2) (9) Proceeds on disposal of subsidiaries 26 Net cash from investing activities (217) (869) (2,386) Cash flows from financing activities Interest paid (351) (179) (400) Interest element of finance lease rental payments (1) (1) (3) Capital element of finance lease rental payments (18) (13) (30) Proceeds from issue of shares to Group shareholders Proceeds from exercise of options over own shares held in employee share ownership trusts Proceeds from increases in and new borrowings 696 2,727 3,518 Movements relating to derivative financial instruments (87) (301) (656) Purchases of own shares (137) (400) Purchase of own shares held in employee share ownership trusts (92) (116) (116) Reductions in and repayments of borrowings (948) (372) (731) Dividends paid to shareholders (1,241) (954) (1,393) Dividends paid to minority interests (112) (79) (173) Net cash from financing activities (2,150) 582 (374) Net cash flows from operating, investing and financing activities (935) Differences on exchange (246) (Decrease)/ increase in net cash and cash equivalents in the period (1,181) 1,071 1,040 Net cash and cash equivalents at 1 January 2,220 1,180 1,180 Net cash and cash equivalents at period end 1,039 2,251 2,220 The accompanying notes on pages 19 to 40 form an integral part of this condensed consolidated financial information. Page 18

20 ACCOUNTING POLICIES AND BASIS OF PREPARATION The condensed consolidated financial information comprises the unaudited interim financial information for the six months to 30 June 2009 and 30 June 2008, together with the audited results for the year ended 31 December This condensed consolidated financial information has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union and the Disclosure and Transparency Rules issued by the Financial Services Authority. They are unaudited but have been reviewed by the auditors and their review report is set out on page 12. The condensed consolidated financial information does not constitute statutory accounts within the meaning of Section 434 of the UK Companies Act 2006 and should be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2008, which were prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and implemented in the UK. The annual consolidated financial statements for 2008 represent the statutory accounts for that year and have been filed with the Registrar of Companies. The auditors report on those statements was unqualified and did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act This condensed consolidated financial information has been prepared under the historical cost convention, except in respect of certain financial instruments, and on a basis consistent with the IFRS accounting policies as set out in the Annual Report for the year ended 31 December 2008, with the following amendments due to certain changes in IFRS, as endorsed by the EU, affecting the Group. These changes are effective from 1 January 2009: IFRS 8 (Operating Segments). This standard requires segmental reporting in the financial statements to be on the same basis as is used for internal management reporting to the chief operating decision maker. This has not required any changes to the segments reported by the Group, however, it has resulted in certain changes to the disclosures; IFRS 2 (Share-based Payment - Vesting Conditions and Cancellations). This interpretation clarifies that vesting conditions are service conditions and performance conditions only, and specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. This change has had no material affect on the Group s reported profit or equity; IAS 1 Revised (Presentation of Financial Statements). This standard requires separate disclosure of non-owner and owner changes in equity. The Group has chosen to show other comprehensive income in a separate statement from the income statement, however, implementation of the standard has not affected the measurement of reported profit or equity; and IAS 23 Revised (Borrowing Costs). This standard requires borrowing costs directly attributable to the acquisition, construction or production of an asset that takes a substantial period of time to get ready for its intended use or sale, to be capitalised as part of the cost of the asset. The Group s previous policy was to expense such borrowing costs as they were incurred. This change has not materially affected the Group s reported profit or equity. Page 19

21 Accounting policies and basis of preparation cont The Annual Improvements to IFRS have been endorsed by the EU, and have varying application dates commencing on or after 1 January The main effect has been a reclassification of derivatives held for trading with a settlement date greater than one year from current to non-current on the balance sheet. The balance sheets of prior reporting periods have been amended to reflect this reclassification and, in accordance with IAS 1 Revised (Presentation of Financial Statements), an additional balance sheet comparative has been presented as at 1 January The effect of the reclassification has been to increase non-current assets and decrease current assets at 31 December 2008 by 3 million (30 June 2008 and 1 January 2008: 1 million) and to increase non-current liabilities and decrease current liabilities at 31 December 2008 by 23 million (30 June 2008: 7 million, 1 January 2008: 10 million). As explained in the 2008 Annual Report, the Group has amended its treatment with regard to the recognition of actuarial gains and losses of retirement benefit schemes under IAS 19, and has adopted IFRIC 14 (IAS 19 The Limit on a Defined Benefit Asset Minimum Funding Requirements and their Interaction). Following these changes, the Group now recognises actuarial gains and losses in the period in which they occur, in the statement of comprehensive income, rather than using partial deferral of such gains and losses through the corridor method as also permitted by IAS 19. The effect of this change in accounting policy on the 30 June 2008 balance sheet and equity is as follows: Balance sheet as at 30 June 2008 m Investments in associates and joint ventures 47 Retirement benefits assets (14) Deferred tax assets 1 Total assets 34 Opening equity (9) Differences on exchange (other comprehensive income) 3 Total equity (6) Retirement benefits liabilities (4) Deferred tax liabilities 44 Total equity and liabilities 34 Apart from the above, the change in accounting policy had no material effect on the income statement or the statement of other comprehensive income for the six months ended 30 June As a result of the change in accounting policy, from 1 January 2009, the Group reviews the asset valuations and actuarial assumptions underlying the retirement benefits of its material schemes on a halfyearly basis. This resulted in the recognition of actuarial losses of 123 million pre-tax at 30 June This review was not carried out at 30 June 2008 and actuarial gains and losses for the year ended 31 December 2008 are deemed to have arisen in the second half of the year. The preparation of the condensed consolidated financial information requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the disclosure of contingent liabilities at the date of the condensed consolidated financial information. Such estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable in the circumstances and constitute management s best judgement at the date of the financial statements. In future, actual experience may deviate from these estimates and assumptions, which could affect the financial statements as the original estimates and assumptions are modified, as appropriate, in the period in which the circumstances change. Page 20